Canada

Round-table on “Societies and the Imperative of Innovation”

It is a great pleasure to participate in this important discussion on the imperative of innovation in our societies.

As advanced economies struggle to consolidate recovery from the deepest financial crisis in modern times, promoting innovation becomes critically important to develop new products, new services, and new ways of doing things. Innovation should be the driving force behind the productivity growth our ageing societies need to improve living standards for all.

At the OECD, we’ve spent time thinking about why some societies invest more in innovation – or do it better – than others. Unfortunately, there is no silver bullet! Rather, our 2010 Innovation Strategy uncovered a range of interdependent factors crucial to a dynamic innovation ecosystem.

First, you need good framework conditions. Without national and international competition, firms do not have the incentives to invest in innovation. Without good financial markets, including markets for risk capital, resources do not flow to firms that want to invest in innovation. And without flexibility in the labour market, firms cannot adjust to changing market conditions.

The central importance of framework conditions – of creating the right environment – implies that innovation needs to be at the core of a comprehensive structural reform agenda. Structural reforms can improve a society’s capacity to innovate by facilitating the smooth and timely allocation of resources to their most productive uses through well-functioning product, labour and capital markets.

For example, innovative entrepreneurs will be encouraged to take the risk of investing in their ideas if we can reduce the price of failure. Reducing the stringency of bankruptcy legislation in a country from the highest to the average level in the OECD could raise capital flows to patenting firms by around 35%, so the impact can be high! But good framework conditions alone are not enough, and some other ingredients are needed to create the right mix.

Second, you need the right quantity and quality of human capital, and this means investing in education and skills. In the end, innovation is about people generating new knowledge and putting it to good use throughout the economy. This may sound easy, but it’s a big problem in many countries.

Results from the OECD’s PIAAC survey of adult skills, published last October, found that 2 out of every 3 workers did not have a sufficient level of skills to succeed in the technology-rich environment that underpins innovation in the 21st century. Young adults in countries like Korea and Finland were top of the class, but significant skills gaps were in evidence in many countries. While Canada ranks second only to Sweden when it comes to problem solving skills, it scores below average in basic numeracy. Today, the OECD is working with many governments to address these challenges by developing national skills strategies.

Thirdly, you need public and private investment in knowledge-based capital – what we call KBC at the OECD. This is not only about research and development, which is essential, but about the whole range of investments that firms and governments make in knowledge, including software, data, skills and even in organisational capital, which help to ensure that investments in R&D turn into innovations that generate growth and employment.

In the United States and several other OECD countries, firms now invest more in KBC than they invest in machinery, equipment and buildings. In Canada, for example, between 1976 and 2008, real investment in KBC increased at 6.4% a year, compared to 4.1% a year for investment in tangible assets.

While business naturally takes the lead in such investments, government has an important role to play. I already mentioned education, but today we also need to look at the infrastructure for knowledge circulation. Broadband networks and an efficient Internet are just as important today as roads and railroads were in the 19th century and telephony in the 20th century. And investment in basic research is key too, to help generate the seeds for future innovation. Many of the technologies we take for granted today, including the Internet, originated from government-funded research!

Fourthly, you need collaboration. This has become increasingly important as the cost and complexity of research and innovation have grown. In some countries and regions, large firms, small firms, universities and governments work together seamlessly to strengthen innovation, benefitting from their respective strengths. In others, universities have few links to business and small and large firms hardly cooperate. In these cases, better policies can help to remove barriers and strengthen the linkages.

So how can countries craft an effective and efficient innovation policy framework? The OECD’s Innovation Strategy urged countries to develop a “whole-of-government” approach, aligning Ministries, policies and reforms into a coherent nation-wide effort to strengthen innovation. Today, we are working with countries around the world to help them strengthen their innovation policies in their own national context. We published reviews of innovation policy for Colombia, Korea, South East Asia and the Netherlands earlier this year, and will be releasing reviews of France and Vietnam later in 2014.

Ladies and gentlemen,

I look forward to our continued collaboration with Canada, with our Members and Partner Countries, and with important stakeholders like the International Economic Forum of the Americas to identify, discuss and diffuse good policy practices. We will soon begin work to update the OECD Innovation Strategy, adding state-of-the-art indicators so that we can benchmark progress. Together, we can shape innovation policies to make sure that they best serve our policy objectives of inclusive and sustainable growth.